10 Shares Held By The UK's Top Small-Cap Investors

These companies are the biggest part of the UK's best-performing small cap fund.

Small-company investment is probably the most exciting arena in portfolio management. While the risks are typically higher, a little research can go a long way.

The Liontrust UK Smaller Companies fund is the best performing UK small-cap unit trust on the market today. In the last 12 months, the fund has made a 8.5% gain. In that time, the FTSE 100 (UKX) has declined 5.2%.

Managers Julian Fosh and Anthony Cross run the fund, investing £96m in 46 different small companies. So, what is their investment philosophy? They provided the answers in a joint statement.

"Many of our boards have ownership levels in double figures -- they share the same long-term goal that we do. The boards of all of our companies must own at least 3% of the listed equity.

1) Dialight

Dialight shares are up fivefold in the last three years.

The case for Liontrust's investment is clear. "Dialight has built a strong and patented niche in LED industrial lighting. Significant growth is being achieved in the replacement of traditional white lights in industrial plants with long lasting LEDs."

Dialight and its shareholders are reaping the rewards of serving a booming industry.

In the last three years, dividends at Dialight have increased by an average of 24% per annum. This has been outpaced by earnings per share (eps) growth. For 2012, the company's dividend is expected to increase by 17.3%, with eps advancing nearly 30%.

It is not just the fund managers at Liontrust that have taken a shine to Dialight. Today, the company trades on 26.3 times forecast earnings for 2013. A recent trading statement showed no signs of any let-up in growth at the company.

2) Iomart Group

Iomart is another company that is enjoying its niche in a booming industry. Iomart is a cloud-computing and managed hosting services company.

In the company's most recent results, hosting revenues were reported as 38% ahead of the previous year. 95% of Iomart's revenues are recurring and gross margin hit 67%. Earnings per share increased 96% and the final dividend was boosted by 38%. These are the kind of numbers that most listed smaller companies would love to report.

The Liontrust guys say: "Iomart has picked clients who require a high service level and this has enabled the company to achieve long-term contracts and high margins."

Iomart shares are trading on 20.4 times the consensus estimate for 2012, falling to a more attractive 16.9 times the 2014 forecast. Such high valuations can see investors lose heavily if growth stumbles. However, Iomart is operating in a highly favourable market. If the forecast growth is delivered, I expect that the shares will be trading higher than they are today.

3) NCC Group

NCC is one of the fastest-growing companies in Liontrust's top 10. In the last six years, revenues at NCC have increased by an average of 28.1% a year. On the same basis, eps has increased 18.0% per annum. The company paid a dividend of 7.25p in 2006. This payout has since increased each year, hitting 16.1p for 2012.

NCC provides a range of information services to corporations. This includes a Distributed Denial of Service (DDoS) simulation tool. This tests a company's IT systems to see if they can withstand one of the most common forms of cyber attack on the internet.

Messrs Fosh and Cross add: "Much of NCC's business is sold via long-term contracts that deliver high-recurring income. NCC is benefiting from the growth of the internet and all of the associated risks of hacking and fraud."

NCC's track record and the analyst community's growth expectations for the business have earned the company a generous rating. Today, shares in the company trade at 15.7 times the consensus forecast for 2013. Those forecasts equate to a level of earnings growth in this year that has not been achieved in the recent past.

4) Charles Stanley Group

Stockbroker Charles Stanley is the fund's only large holding that is down this year. In the last 12 months the shares have fallen 16.5%.

A trading statement issued last week presented a mixed picture. Revenues for the quarter were down 8.7% and client funds showed a small decline of 2%. The discretionary managed funds side of the business successfully outperformed. Funds under management in this segment advanced 3.0%. In the period under review the FTSE 100 fell 6.0%.

Charles Stanley is a committed dividend-hiker. In the last six years the company has increased its dividend year-in, year-out at an average of 6.8% per annum. An 8.9% rise is forecast for 2013.

Charles Stanley operates in a market Messrs Fosh and Cross know inside-out. Their perspective gives them a knowledge of the business that few apart from Charles Stanley's own managers could match.

If you think that you could learn more from top investors, check out our free report on legendary UK fund manager Neil Woodford. He avoided techs in the dotcom bubble and banks in the credit boom. But just where is Neil Woodford investing today? All is revealed in this free Motley Fool report -- "8 Shares Held By Britain's Super Investor".

If you like to buy at the bottom then "Legal and General UK Alpha Trust" by Richard Penny have a number of low p/e high growth shares that failed to rally this year. An uplift in the market and I would presume this fund would rise the most like it did when it bought shares during the crash of 2007.

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